Over the past decade, the issue of NPLs has posed a significant economic challenge within the Eurozone hampering economic growth and driving increased regulatory reform across Europe.
The Eurozone has witnessed NPL resolution transaction activity migrate gradually in the past ten years through a range of different countries, market sectors and asset classes.
Seller and Investor Perspectives: Key Trends
- the volume of NPLs in the European market as a whole has been reduced by over a third since 2016 alone, from €1.12trn to €714.3bn, according to the latest available data from the European Banking Authority ; and
- tangible market activity has now commenced in all of the major European NPL-burdened jurisdictions following the successful launch and completion of a number of formative transactions in both Greece and Cyprus in 2018.
It is, therefore, unsurprising that in these special situations, investors continue to find it challenging to source attractive investment opportunities with meaningful upside in Europe.
The mature Western European markets are close to buy-side saturation and the demand-supply imbalance is increasingly pushing prices beyond the 
levels at which distressed and special opportunities investors are customarily prepared to participate.
For these reasons, the focus of NPL investors has continued to evolve and migrate in recent years with seasoned buy-side investors increasingly expanding their geographical reach, seeking to replicate their past investment successes, in more mature jurisdictions, further afield.
Italy, Spain and Greece are currently at the forefront of the investor communitys attention and are continuing to experience significant deal volumes. For the purposes of this report, we were keen to understand how NPL sellers and investors viewed the current and prospective opportunities in Europe at this pivotal point in time and where their potential focus may migrate next.
The NPL pipeline remains strong for the foreseeable future
Despite the ever-increasing maturity of the European markets and declining NPL volumes in Europe generally, our research results suggest that there will be little slowdown in the short-term supply of transactions being brought to market in Europe and elsewhere. Ninety-six percent of sell-side institutions report that they are at least “Moderately Likely” to bring a portfolio to market in the next 12 months 68% are either “Certain” or “Very likely” to do so.
Similarly, while the types of disposal and resolution transactions and strategies deployed by NPL sellers have evolved and broadened, sellers continue to demonstrate a fundamental preference for outright sales processes.
Forty-four percent of sell-side institutions express a preference for outright loan sales, demonstrating the importance to sellers of the “clean break” principle which prevailed in the early Western European NPL markets.
Thirty-two percent of sell-side institutions are primarily seeking to enter into either joint venture arrangements or synthetic transactions. The appetite for securitisation can be attributed to jurisdictions such as Greece and Italy, where established securitisation laws can be used to facilitate disposals where local law and regulation present greater impediments to “plain-vanilla” sales.
While securitisations (16%) and joint ventures (16%) typically involve more complex structuring, they bring certain key advantages such as the ability to replicate outright sale structures while maintaining execution certainty by using tried and tested securitisation laws. Securitisations are also more conducive to facilitating larger transactions (by allowing the tranching of risk and the ability of the vendor to retain an element of economic upside in the portfolio being sold).
It is interesting that 24% of selling financial institutions stated a preference for internal work-out of their NPL books. This is a higher percentage than seen in previous years and demonstrates an increased confidence by banks in their own internal infrastructure to manage NPL positions.